Accounting Firm Consolidation: Selected Large Public Company	 
Views on Audit Fees, Quality, Independence, and Choice		 
(30-SEP-03, GAO-03-1158).					 
                                                                 
The largest accounting firms, known as the "Big 4," currently	 
audit over 78 percent of U.S. public companies and 99 percent of 
public company annual sales. To address concerns raised by this  
concentration and as mandated by the Sarbanes-Oxley Act of 2002, 
on July 30, 2003, GAO issued a report entitled Public Accounting 
Firms: Mandated Study on Consolidation and Competition, 	 
GAO-03-864. As part of that study, GAO surveyed a random sample  
of 250 public companies from the Fortune 1000 list; preliminary  
findings were included in the July report. This supplemental	 
report details more comprehensively the 159 responses we received
through August 11, 2003, focusing on (1) the relationship of	 
their company with their auditor of record in terms of		 
satisfaction, tenure relationship, and services provided; (2) the
effects of consolidation on audit fees, quality, and		 
independence; and (3) the potential implications of consolidation
for competition and auditor choice.				 
-------------------------Indexing Terms------------------------- 
REPORTNUM:   GAO-03-1158					        
    ACCNO:   A08620						        
  TITLE:     Accounting Firm Consolidation: Selected Large Public     
Company Views on Audit Fees, Quality, Independence, and Choice	 
     DATE:   09/30/2003 
  SUBJECT:   Auditing standards 				 
	     Auditors						 
	     Competition					 
	     Corporate audits					 
	     Corporate mergers					 
	     Financial statement audits 			 

******************************************************************
** This file contains an ASCII representation of the text of a  **
** GAO Product.                                                 **
**                                                              **
** No attempt has been made to display graphic images, although **
** figure captions are reproduced.  Tables are included, but    **
** may not resemble those in the printed version.               **
**                                                              **
** Please see the PDF (Portable Document Format) file, when     **
** available, for a complete electronic file of the printed     **
** document's contents.                                         **
**                                                              **
******************************************************************
GAO-03-1158

United States General Accounting Office

GAO	Report to the Senate Committee on Banking, Housing, and Urban Affairs
and

                   the House Committee on Financial Services

September 2003

ACCOUNTING FIRM CONSOLIDATION

 Selected Large Public Company Views on Audit Fees, Quality, Independence, and
                                     Choice

                                       a

GAO-03-1158

September 2003

ACCOUNTING FIRM CONSOLIDATION

Views of Surveyed Large Public Companies on Audit Fees, Quality, Independence,
and Choice

Most of the 159 respondents said that they were satisfied with the current
auditor, and half had used their current auditor for 10 years or more (see
figure below). Generally, the longer a respondent had been with an
auditor, the higher the overall level of satisfaction. Consistent with
high levels of satisfaction, GAO found that, aside from former clients of
Arthur Andersen, few respondents had switched auditors in the past decade.
When they did, they switched because of reputation, concerns about audit
fees, and corporate mergers or management changes. In looking for a new
auditor, the most commonly cited factors the respondents gave were quality
of service, industry specialization, and "chemistry" with the audit team.
Finally, almost all respondents used their auditor of record for a variety
of nonaudit services, including tax-related services and assistance with
company debt and equity offerings.

Respondents had differing views about whether past consolidation had some
influence on audit fees, but most believed that consolidation had little
or no influence on audit quality or independence. Respondents commented
that other factors-such as new regulations deriving from the
Sarbanes-Oxley Act and changing auditing standards-have had a greater
impact on audit price, quality, and independence.

While half of the respondents said that past consolidation had little or
no influence on competition and just over half said they had a sufficient
number of auditor choices, 84 percent also indicated a preference for more
firms from which to choose as most would not consider using a non-Big 4
firm. Reasons most frequently cited included (1) the need for auditors
with technical skills or industry-specific knowledge, (2) the reputation
of the firm, and (3) the capacity of the firm. Finally, some expressed
concerns about further consolidation in the industry and the limited
number of alternatives were they to change auditors under existing
independence rules.

Highlights of GAO-03-1158, a report to Senate Committee on Banking,
Housing, and Urban Affairs and the House Committee on Financial Services

The largest accounting firms, known as the "Big 4," currently audit over
78 percent of U.S. public companies and 99 percent of public company
annual sales. To address concerns raised by this concentration and as
mandated by the Sarbanes-Oxley Act of 2002, on July 30, 2003, GAO issued a
report entitled Public Accounting Firms: Mandated Study on Consolidation
and Competition, GAO-03-864. As part of that study, GAO surveyed a random
sample of 250 public companies from the Fortune 1000 list; preliminary
findings were included in the July report. This supplemental report
details more comprehensively the 159 responses we received through August
11, 2003, focusing on (1) the relationship of their company with their
auditor of record in terms of satisfaction, tenure relationship, and
services provided; (2) the effects of consolidation on audit fees,
quality, and independence; and (3) the potential implications of
consolidation for competition and auditor choice.

                  Length of Relationship with Current Auditor

                              Number of companies

                                       40

                                       40

                                       30

                                       20

                                      10 0

www.gao.gov/cgi-bin/getrpt?GAO-03-1158.

To view the full product, including the scope and methodology, click on
the link above. For more information, contact Davi M. D'Agostino at (202)
512-8678 or d'[email protected].

Former Andersen clients that switched within the last 2 years Source: GAO.

All other respondents

Contents

  Letter

Results in Brief
Background
Most Respondents Were Satisfied with Their Auditor, Had Long-term

        Relationships, and Used Their Auditor for a Variety of Services

Respondents Had Differing Views about Past Consolidation's Influence on
Audit Fees but Most Agreed That It Had Little or No Influence on Audit
Quality or Auditor Independence

Respondents Were Concerned That Limited Audit Choices May Create Problems

1 2 4

5

10 13

Appendixes

                                       Appendix I: Appendix II: Appendix III:

Appendix IV:

Scope and Methodology

Annotated Public Company Survey

Summary of Written Comments to the Public Company Survey

Change in Audit Quality
Number of Auditor Options Available
Sufficiency of the Number of Options
Willingness to Use Auditor of Competitor
Minimum Number of Firms Necessary
Optimal Number of Firms
Suggestions for Increasing Competition
Additional Comments

GAO Contacts and Staff Acknowledgments

GAO Contacts
Staff Acknowledgments

                                     19 21

36 36 38 40 41 42 43 45 46

51 51 51

Tables	Table 1: Table 2: Table 3:

Table 4: Table 5:

Table 6: Table 7: Table 8:

Respondents That Had Switched Auditors Since 1987 8
Explanations for Changes in Audit Quality 37
Explanations for the Number of Auditor Options
Available 39
Number of Auditor Options Available 40
Explanations of Why a Company Would or Would Not
Choose the Auditor of a Competitor 41
Explanations of Minimum Number of Firms Necessary 42
Explanations of Optimal Number of Firms 44
Suggestions for Taking Action to Increase Competition 45

                                    Contents

                        Table 9: Additional Comments 47

Figures	Figure 1: Figure 2: Figure 3: Figure 4:

Figure 5:

Figure 6:

Figure 7:

Length of Relationship with Current Auditor 6
Satisfaction with Current Auditor, by Tenure 7
Factors Cited in Choosing a New Auditor 9
Views on Change and Impact of Past Consolidation on
Audit Fees 11
Views on Changes in and Impact of Past Consolidation on
Audit Quality 12
Views on Changes in and Impact of Past Consolidation on
Auditor Independence 13
Reasons Cited for Not Using a Non-Big 4 Firm 15

Abbreviations

GAAP generally accepted accounting principles
GAAS generally accepted auditing standards
SIC Standard Industry Classification
SEC Securities and Exchange Commission

This is a work of the U.S. government and is not subject to copyright
protection in the United States. It may be reproduced and distributed in
its entirety without further permission from GAO. However, because this
work may contain copyrighted images or other material, permission from the
copyright holder may be necessary if you wish to reproduce this material
separately.

A

United States General Accounting Office Washington, D.C. 20548

September 30, 2003

The Honorable Richard C. Shelby
Chairman
The Honorable Paul S. Sarbanes
Ranking Minority Member
Committee on Banking, Housing, and Urban Affairs
United States Senate

The Honorable Michael G. Oxley
Chairman
The Honorable Barney Frank
Ranking Minority Member
Committee on Financial Services
House of Representatives

The number of public accounting firms widely considered capable of
providing audit services to large national and multinational public
companies decreased from eight (the "Big 8") in the 1980s to four (the
"Big
4") today.1 These four firms currently audit over 78 percent of all U.S.
public companies and 99 percent of public company annual sales. The Big
4 also dominate the market for audit services internationally. On July 30,
2003, we issued a report on the impact of this consolidation on
competition
and audit services provided to large national and multinational companies
(as mandated by the Sarbanes-Oxley Act of 2002).2 This supplemental
report details more comprehensively the responses we received through
August 11, 2003, to a survey of a random sample of Fortune 1000 companies
on their experiences with their auditors of record.3 Specifically, our
objective was to obtain the views of the chief financial officers of large

1The Big 8 were Arthur Andersen LLP, Arthur Young LLP, Coopers & Lybrand
LLP, Deloitte Haskins & Sells LLP, Ernst & Whinney LLP, Peat Marwick
Mitchell LLP, Price Waterhouse LLP, and Touche Ross LLP. The Big 4
accounting firms are Deloitte and Touche LLP, Ernst & Young LLP, KPMG LLP,
and PricewaterhouseCoopers LLP. These firms differ from other firms by
their total revenues, size, and global reach.

2See U.S. General Accounting Office, Public Accounting Firms: Mandated
Study on Consolidation and Competition, GAO-03-864 (Washington, D.C.: July
30, 2003) and Pub. L. No. 107-204 S: 701 (2002).

3We also surveyed the 97 largest public accounting firms for their views
on accounting firm consolidation and its potential implications; their
responses are included in our July 30, 2003, report. This report focuses
on the views of large public companies as clients of accounting firms.

national and multinational public companies on (1) the relationship of
their company with their auditor of record in terms of satisfaction,
tenure of the relationship, and services provided; (2) the effects of
consolidation on audit fees, quality, and auditor independence; and (3)
the potential implications of consolidation for competition and auditor
choice.

We drew a random sample of 250 of the largest publicly held companies from
the 2003 list of the Fortune 1000 companies produced by Fortune, a
division of Time, Inc., after removing 40 private companies from this
list. Of the 250 companies surveyed, we received responses from 159
companies, or 64 percent; all of whom used a Big 4 firm as their auditor
of record. The response rates for individual questions varied, depending
on how many respondents answered each question. Because of the limited
level of participation in the survey, the responses discussed in this
report reflect only the views of the public companies that responded to
the survey and are not projected to the entire population of public
Fortune 1000 companies. Appendix I discusses our survey methodology in
detail. A copy of the questionnaire, annotated to show the respondents'
answers to each question, is included as appendix II. In addition, nearly
94 percent (149 of 159) of the respondents provided narrative comments on
at least one of the key questions about their experiences with their
auditors of record. Included as appendix III, these narrative comments
provide valuable insight into how the respondents interpreted key
questions and amplify the respondents' views and experiences.

Results in Brief	Most of the public companies responding to the survey
(respondents) said they were satisfied with their current auditor, half
had used their current auditor for 10 years or more, and almost all used
their auditor of record for other nonaudit services. More than
three-quarters of the respondents said that they were satisfied with their
relationship with their current auditor of record. We also found an
association between audit tenure and satisfaction. That is, the longer
respondents had been with their current auditors, the more satisfied they
were. Company-auditor relationships averaged 19 years, ranging from less
than 1 year to 94 years. Although 61 of the 159 respondents had switched
auditors since 1987, 37 of the 61 were former clients of Arthur Andersen
(Andersen) that had switched since 2001. Aside from the dissolution of
Andersen, other reasons cited for changing auditors included concerns
about auditor reputation, concern about the fees charged for audit and
attest services, mergers and other ownership or management changes, and
the desire to obtain a "fresh perspective." When looking for a new
auditor, most respondents said

quality of services, the auditor's reputation, industry specialization or
expertise, and the engagement team's chemistry or perceived ability to
work with the company were of "great" or "very great" importance. Almost
all the respondents used their auditor of record for a variety of services
besides audit and attest, such as tax-related services and assistance with
company debt and equity offerings.

Respondents had differing views about whether the past consolidation of
public accounting firms had some influence on audit fees, but most
believed that it had little or no influence on audit quality or auditor
independence. Although most (93 percent) respondents indicated that audit
fees had increased over the past decade, they were split evenly between
those who thought that the consolidation among the largest public
accounting firms had an "upward influence" on audit fees and those who
thought that it had "little or no influence" (47 percent versus 46
percent). More than twice as many respondents believed that audit quality
increased over the past decade than decreased (44 percent compared to 18
percent) and a majority (63 percent) believed that accounting firm
consolidation had little or no influence on changes in audit quality.
Rather than consolidation, some respondents cited other reasons for
changes in audit quality, such as new regulations resulting from the
Sarbanes-Oxley Act and a change in the audit partner in charge of their
audit.4 Similarly, while many respondents (59 percent) agreed that
independence had increased over the past decade, 72 percent of respondents
believed that the past consolidation had little or no influence on auditor
independence.

While a majority of respondents believed that past consolidation had
little or no impact on competition, many were concerned that the limited
number of choices they have for audit services might create problems,
given that 88 percent of the respondents said that they would not consider
using a non-Big 4 firm for audit and attest services. The reasons they
cited for choosing a Big 4 over a non-Big 4 firm included industry and
technical expertise, reputation, and geographic presence. While over half
of the 158 respondents said that the options their company currently had
were adequate, some companies expressed concerns about having too few
alternatives if they were to change auditors. Respondents cited multiple

4Sarbanes-Oxley requires that the Securities and Exchange Commission (SEC)
enact independence rules, which address areas such as prohibited nonaudit
services, audit partner rotation, and conflicts of interest. See Pub. L.
No. 107-204, Title II S: 201- S: 206 and 17 C.F.R. Parts 210 and 240,
Final Rule: Revision of the Commission's Auditor Independence
Requirements.

reasons to explain their concerns about limited choices among the Big 4,
including auditor independence rules and their companies' need for certain
industry expertise. Moreover, a large majority (86 percent) of respondents
said that they would prefer a market with more than four big firms. Many
of these respondents also commented that they did not want to see further
consolidation within the Big 4. However, almost two-thirds of all
respondents said that they would not suggest any actions, such as
government intervention, to increase competition in the provision of audit
and attest services for large national and multinational companies.

Background	Since the Securities Act of 1933 and the Securities Exchange
Act of 1934 established the principle of full disclosure-requiring public
companies to provide full and accurate information to the investing
public-public accounting firms have played a critical role in companies'
financial reporting and disclosure. While officers and directors of a
public company are responsible for the preparation and content of
financial statements that fully and accurately reflect the company's
financial condition and the results of its operations, public accounting
firms, which function as independent external auditors are expected to
provide an additional safeguard. The external auditor is responsible for
auditing companies' financial statements in accordance with generally
accepted auditing standards (GAAS) to provide reasonable assurance that a
company's financial statements are fairly presented in all material
respects in accordance with generally accepted accounting principles
(GAAP).

Public accounting firms offer a broad range of services to their clients.
In addition to traditional audit and attest and tax services, firms also
offer consulting services in areas such as information technology.
Although all of the Big 4 firms continue to offer certain consulting
services, three of the Big 4 have sold or divested portions of their
consulting businesses.5 Following the implementation of Sarbanes-Oxley,
SEC issued new independence rules in March 2003, which place additional
limitations on management consulting and other nonaudit services that
firms could provide to their audit clients. Sarbanes-Oxley also requires
auditors to report to and be overseen by a public company's audit
committee, which consists of members of the company's board of directors
who are required

5PricewaterhouseCoopers' consulting practice was sold to International
Business Machines Corp.; KPMG's consulting practice became BearingPoint;
and Ernst & Young sold its practice to Cap Gemini Group USA.

to be independent. The external auditor also interacts closely with the
company's senior management, including the chief financial officer.

Most Respondents Were Satisfied with Their Auditor, Had Long-term
Relationships, and Used Their Auditor for a Variety of Services

Most of the survey respondents said they were satisfied with their current
auditor. Moreover, half of the respondents reported that they have had the
same auditor of record for 10 or more years.6 Respondents gave various
reasons for changing auditors, including concerns about their auditor's
reputation and fees. They also told us what factors would drive their
decision in choosing a new auditor. Almost all respondents said that they
used their auditor of record for more than audit and attest functions,
including tax-related services and assistance with company debt and equity
offerings.

High Degree of Client Satisfaction and Auditor Tenure

Overall, 80 percent (127 out of 158 respondents answering this question)
of the respondents said they were "very" or "somewhat" satisfied with
their current auditor of record, while 12 percent (19 of 158) said that
they were very or somewhat dissatisfied, and 8 percent (12 of 158) said
they were neither satisfied nor dissatisfied. Similarly, of the 135
respondents that provided the year they first employed their auditor of
record, half of them said they had retained their auditor of record for 10
years or more. The average tenure was 19 years, ranging from less than 1
year to 94 years. When the 37 public companies that switched from Andersen
because of Andersen's dissolution were excluded, the average tenure
increased to 25 years, and the percentage of public companies that had
retained their auditor for 10 years or more increased to 68 percent.
Figure 1 shows the length of the relationship these respondents had with
their current auditor.

6 The 159 respondents include 37 public companies that had to switch from
Andersen since 2002; Andersen dissolved in 2002.

Figure 1: Length of Relationship with Current Auditor

Number of companies

40

40

35

30

25

20

15

10

5

0 <2 2-5 6-10 11-15 16-20 21-25 26-30 31-40 41-50 51-94 Years

Former Andersen clients that switched within the last 2 years

All other respondents

Source: GAO.

We found that there was an association between the length of the
company-auditor relationship and satisfaction. That is, the longer the
relationship between a company and its auditor, the more likely that the
company was satisfied with its auditor of record. As figure 2 shows, 94
percent (30 of 32) of companies with auditor tenure of more than 30 years
were very or somewhat satisfied with their auditor, whereas 70 percent (28
of 40) of companies using their current auditor for 1 year or less said
they were very or somewhat satisfied with their auditor.

Figure 2: Satisfaction with Current Auditor, by Tenure

Percentage

100

                                       94

80

60

40

20

0

Less than More than 1 More than 10 30 or 1 year to 10 years to 30 years
more years

Tenure with current auditor

Satisfied

Dissatisfied

Source: GAO.

Sixty-one of the respondents reported that they switched auditors since
1987. Of those 61, 37 were former Andersen clients that switched within
the last 2 years as a result of Andersen's dissolution, five were former
Andersen clients that switched over 2 years ago for reasons other than
Andersen's dissolution, and 19 were other respondents that switched from
another Big 4 or non-Big firm since 1987, as shown in table 1. The
respondents who were clients of Andersen and had to change auditors within
the last 2 years as a result of Andersen's dissolution were somewhat less
satisfied with their current auditor than a separate group of 19
respondents that had switched from another Big 4 or non-Big 4 firm since
1987. Of the 37 former Andersen clients, 25 respondents indicated that
they were satisfied with their current auditor of record, seven said that
they were dissatisfied with their current auditor, and five said they were
neither satisfied nor dissatisfied. Of the 19 other respondents that
switched from other firms since 1987, proportionally more (16 respondents)
said they were satisfied with their current auditor of record, while only
one was

somewhat dissatisfied and two were neither satisfied nor dissatisfied.
While this suggests that clients leaving Andersen because of its
dissolution are less satisfied with their current audit arrangements than
other firms that had changed auditors in the past, it is important to note
that the 37 respondents who were former Andersen clients also had the
shortest tenures with their current auditors, which may in part explain
their lower satisfaction.

Table 1: Respondents That Had Switched Auditors Since 1987 Categories of
companies that Satisfied with

 Dissatisfied with Neither satisfied nor Number of switching switched auditors
             current auditor current auditor dissatisfied companies

       Former Andersen clients that switched                         
         within the past 2 years because of                          
           Andersen's dissolution in 2002            25        7        5     
       Former Andersen clients that switched                         
       from Andersen from 1987 through 2000,                         
                 for other reasons                    3        0        2     
        Respondents that switched from other                         
      Big 4 or non-Big 4 firms (not Andersen)                        
               from 1987 through 2003                16        1        2     
                       Total                         44        8        9     

Source: GAO.

Respondents Cited Varied Reasons for Changing Auditors and Factors for
Selecting a New Auditor

Respondents gave a variety of reasons for switching, including concerns
about the reputation of their auditor, the need to retain an auditor that
could meet companies' new demands, concerns about the level of fees
charged for audit and attest services, and increased demands resulting
from a corporate merger or change in company ownership. Four respondents
said their relationship with their former auditor was no longer working,
and another respondent cited a disagreement over an accounting policy that
resulted in the switch. While none of the respondents said their company
had a mandatory rotation policy, two respondents said their companies
switched auditors to obtain a "fresh perspective" and "as a form of good
governance."

When we asked the respondents what factors would drive their decision if
they had to choose a new auditor, they most often cited "quality of
services offered" as a factor of "very great" or "great" importance (99
percent or 157

of 159).7 The second most highly rated factor was "reputation or name
recognition of the auditor" (83 percent or 132 of 159), followed by
"industry specialization or expertise" (81 percent or 128 of 159).

Figure 3: Factors Cited in Choosing a New Auditor Factors

                                                   76                      23 

Quality of services offered

                                                       42                  41 

Reputation or name recognition

                                                       50                  31 

Industry specialization or expertise

         Chemistry/perceived ability to effectively work with engagement team

                                                         31                43 

                                      15           39 

                                     Price

              Ability of auditor to handle company's international operations

                                      32          17 

                                      5        31 

                           Number of services offered

                                      8       26 

Auditor's proximity to company's headquarters

0 20406080

                                   Percentage

                             Very great importance

Ninety-four percent (149 of 159) of respondents obtained other services
from their auditors in addition to audit and attest services. We asked
respondents if their auditor provided any of the three following
categories of services: tax-related, assistance with company debt and
equity offerings,

7The survey stated that "Audit quality is thought to include the knowledge
and experience of audit firm partners and staff, the capability to
efficiently respond to a client's needs, and the ability and willingness
to appropriately identify and surface material reporting issues in
financial reports."

                                Great importance

                                  Source: GAO.

Almost All Respondents Used Auditors for Nonaudit Services

and "other services." Only 10 companies, or 6 percent, reported that their
auditor of record provided them with only audit and attest services.
Respondents for the remaining 149 companies said they used their auditor
of record for one or a combination of other services. Specifically, 87
percent (130 of 149) said their auditor provided tax-related services,
such as tax preparation and 71 percent (106 of 149) said they received
assistance with company debt and equity offerings. Thirty-seven percent
(55 of 149) said they received other services, such as merger and
acquisition due diligence, internal control reviews, or tax planning
assistance.

Respondents Had Differing Views about Past Consolidation's Influence on
Audit Fees but Most Agreed That It Had Little or No Influence on Audit
Quality or Auditor Independence

Respondents had differing views about the impact of past consolidation
among the largest accounting firms on audit fees, but most agreed that it
had little or no influence on audit quality or auditor independence. While
93 percent (147 of 158) of respondents said that their audit fees
increased over the past decade, they were almost evenly divided about
whether past consolidation of the largest accounting firms had a "moderate
upward" or "great upward" influence (47 percent or 75 of 158) or little or
no influence (46 percent or 72 of 158). See figure 4.

Figure 4: Views on Change and Impact of Past Consolidation on Audit Fees

Change in fees

Impact of past consolidation on fees

                                                                        Great
                                                            Greatly 32 upward
                                                          increased influence

ModerateSomewhat 61 upwardincreased influence

Little or 2 Little or no change no influence

ModerateSomewhat 4 downwarddecreased influence

                                                                        Great
                                                           Greatly 1 downward
                                                          decreased influence

Don't know 0 Don't know

6

41

46

1

0

6

0 1020304050607080 0 10203040506070

Percentage Percentage

Source: GAO.

More respondents said that audit quality had increased over the past
decade rather than decreased, but the majority of them did not believe
that past consolidation of the largest accounting firms influenced these
changes. Specifically, 44 percent (69 of 158) of the respondents said that
audit quality had increased, while 18 percent (29 of 158) said quality had
decreased and 37 percent (58 of 158) said there had been little or no
change. However, 63 percent (100 of 158) of the respondents believed that
consolidation of the largest firms had little or no influence on the
quality of audit and attest services their companies received (see fig.
5).

The respondents provided other reasons for changes in audit quality,
including changes in audit partner, new regulations and audit standards,
and technical expertise of the audit team. Several respondents cited the
importance of the assigned audit partner to overall audit quality. One
respondent noted, "The partner in charge is critical [to audit quality]."
Another respondent said audit quality improved because of "more personal
involvement of the audit partner." Other respondents believed that changes
in audit quality were due to changes in audit methodologies and the
Sarbanes-Oxley Act. According to one respondent, "The change in the depth
and quality of the audit process is due to a more rigorous regulatory

and litigation environment and not to audit firm consolidation." Another
respondent noted, "Following the Sarbanes-Oxley Act and Andersen's
downfall, other firms are increasing the level of work they do and the
depth of the audit." Finally, we received comments about the skills and
experience of the audit team. One respondent wrote, "Answers to accounting
questions take too long and quality of staff is poor. Fundamental audit
practices are gone." Another respondent similarly commented that the
"level of experience seems to have declined, contributing to lower
quality, [and] partners supervise more jobs." However, that same
respondent also noted that since his company had changed auditors, the
"level of experience has improved."

Figure 5: Views on Changes in and Impact of Past Consolidation on Audit
Quality

Change in quality Impact of past consolidation on quality

Much Very better 9 positive 2 influence

SomewhatSomewhat 35 positive 15better influence

Little or 37 Little or 63 no change no influence

Somewhat Somewhat 16 negative 16 worse influence

Much Very 2 negative 0 worse influence

Don't know 1 Don't know 4

0 1020304050607080 0 10203040506070

Percentage Percentage

Source: GAO.

Finally, 59 percent (94 of 158) of the respondents indicated that their
auditor had become more independent over the past decade, while 1 percent
(2 of 158) said that their auditor had become less independent and 38
percent (60 of 158) said that there had been no change in their auditor's
independence. However, 72 percent (114 of 158) of the respondents also
said that past consolidations of the largest accounting firms had little
or no influence on auditor independence (see fig. 6). The remaining views
varied, with 16 percent (26 of 158) of respondents believing that the

consolidations had a negative influence on auditor independence and 8
percent (12 of 158) saying that it had a positive influence. Some of the
respondents commented that audits had been positively affected by SEC's
new independence requirements, while one respondent said that the new
rules had not significantly enhanced auditor independence.

Figure 6: Views on Changes in and Impact of Past Consolidation on Auditor
                                  Independence

Change in independence

         Much                
                more 11      
independent               
       Somewhat              
                more              48 
independent               

Little or

38

no change

Somewhat less 1 independent

Much less 1 independent

Don't know 1

0 1020304050607080

Percentage

Source: GAO.

                  Impact of past consolidation on independence

                                                      Very positive influence

                                                  Somewhat positive influence

Little or no influence

                                                  Somewhat negative influence

                                                      Very negative influence

Don't know

3

5

72

15

1

4

0 10203040506070 Percentage

Respondents Were Concerned That Limited Audit Choices May Create Problems

Respondents raised concerns about the future implications of
consolidation, especially about possible limitations on audit firm choice.
A significant majority of respondents said that their companies would not
use a non-Big 4 accounting firm for audit services, which limited their
choices. While most respondents said that they would be able to use
another Big 4 firm as their auditor of record if they had to change, they
also said that they would prefer more large firms from which to choose.
Moreover, they raised concerns that further consolidation among the
largest accounting firms would result in too few choices. Yet, despite
those concerns, most respondents favored allowing market forces to dictate
the level of competition in the market for audit and attest services.

Respondents Preferred Big 4 Firms over Non-Big 4 Firms for Audit Services

Eighty-eight percent (139 of 158) of respondents indicated that they would
not consider using a non-Big 4 firm for audit and attest services. As
shown in figure 7, nearly all the respondents cited three factors as being
of great or very great importance in determining why their companies would
not use a non-Big 4 firm: (1) auditor's technical skills and knowledge of
the company's industry (91 percent or 126 of 138); (2) the reputation of
the accounting firm (91 percent or 126 of 138); and (3) the capacity of
the firm (90 percent or 125 of 138). These three factors also corresponded
closely to the most frequently cited factors in choosing a new auditor as
previously noted in figure 3. One respondent noted, "We have operations in
40 countries and want all our auditors to operate with the same systems
and procedures. Only a global firm can deal with this complexity in a
cost-effective manner and give us the continuity of support for U.S.
generally accepted accounting principles and local statutory
requirements." Another respondent noted, "We would want a Big 4 firm
because of its global presence and capabilities, reputation, and depth of
resources available." Sixty-five percent (89 of 137) of respondents also
cited geographic presence and 60 percent (81 of 134) cited the lack of
consent from the company's board of directors as reasons of great or very
great importance. Respondents also provided the following reasons as to
why they would not use a non-Big 4 firm: their shareholders would not want
a non-Big 4 firm; to gain investor confidence or stock market acceptance;
Big 4 firms have financial resources to stand behind their work; public
companies are expected to use them; and the quality of services from a Big
4.

             Figure 7: Reasons Cited for Not Using a Non-Big 4 Firm

                                    Factors

                                       Technical skill/ knowledge of industry

                                                  64                       27 

                                                  57                       34 

Reputation of audit firm

                                                  48                       42 

Capacity of audit firm

                                   Geographic presence required of audit firm

                                                         37                28 

                                      25              35 

Board of directors would not allow it

                                      19          26 

Inferred obligation to use Big 4 firm

                                   Contractual obligation to use a Big 4 firm

                                      7    14 

0 20406080

                                   Percentage

                             Very great importance

While 57 (90 of 158) percent of respondents said that the number of firms
their companies could use for audit and attest services was adequate as
compared with the 43 percent (68 of 158) who said it was not, 86 percent
(117 of 136) told us that ideally there should be more than four large
accounting firms as viable choices for large national and multinational
public companies. In responding to our question on what they thought the
optimal number of firms for large companies should be, 74 percent (100 of
136) said they would prefer from five to eight large accounting firms to
provide audit and attest services to large national and multinational
public companies and 12 percent (17 of 136) of the respondents preferred
more than eight firms. Fourteen percent (19 of 136) of the respondents
said four or fewer firms would be optimal. Most comments we received in
favor of more firms addressed the need to increase competition, decrease
fees, and

                                Great importance

                                  Source: GAO.

Majority of Survey Respondents Preferred More Audit Choices

comply with the new independence rules as required by Sarbanes-Oxley.
Respondents noted, "More firms will improve the competition in the
[accounting] industry," "more choices, more competition, lower cost," and
"one firm provides [our] tax planning services which may impair [its]
independence." Another respondent wrote, "Slightly more options would
enhance technical resourcing opportunities external to current auditors."

However, we also received many comments cautioning that too great a number
of firms might have negative implications. One respondent said, "Any
greater number of firms would have difficulty in maintaining scale to
properly serve large international companies." According to another
respondent, "If the number gets too big, then [it would be] hard to have
level of expertise in certain industries." Some respondents felt that four
or five big firms would be sufficient. One respondent wrote, "As a firm
believer in the efficiency of the marketplace, I believe that the current
number of large firms (4) is probably close to the optimum number, but
wouldn't mind seeing another major firm gradually emerge." Another
respondent wrote, "Balance must be struck between competition and
fragmentation of a fixed talent pool."

Respondents Said Further Consolidation Would Result in Too Few Choices

When asked the minimum number of accounting firms necessary to provide
audit and attest services to large national and multinational public
companies, 82 percent (120 of 147) of respondents indicated that the
market was either at its minimum or already below the minimum number
required. Fifty-nine percent (86 of 147) said that four or five large
accounting firms would be the necessary minimum. According to one
respondent, "Four is the absolute minimum, because if you currently use
one firm for external audit purposes and another firm for internal audit
purposes, that only leaves two other firms from which to choose if you
want to change auditors or use a Big 4 firm for consulting services."

Some respondents pointed out that not even all the Big 4 firms have the
necessary industry expertise required to conduct their companies' audits.
According to one respondent, "From a realistic standpoint, only one other
Big 4 firm has a utility practice that would help [it] understand our
industry." Another respondent wrote, "We use one of the Big 4. Two of them
do not have industry expertise. Only one of the remaining three has
industry expertise in the geographic region."

Although Sarbanes-Oxley prohibits a company's external auditor from
providing internal audit services and certain other consulting services to

the same company, many companies currently use one of the Big 4 as their
external auditor and one of the remaining three Big 4 firms for nonaudit
services such as tax consulting and internal audits. Therefore, a company
with this arrangement that needed to change auditors would have one fewer
alternative or would need to terminate its internal audit or consulting
relationship. For example, one respondent noted, "Aside from our current
auditor, we use another of the Big 4 as a co-source provider of internal
audit services, so [we] would not consider them. We are using a third for
tax work so it would be hard under Sarbanes-Oxley to switch to them."

Most Respondents Prefer to Allow Market Forces to Dictate the Level of
Competition in the Audit Market

Despite the fact that 94 percent of respondents said they had three or
fewer options from which to choose if they had to change auditors, 62
percent (98 of 159) of respondents said they would not suggest that any
actions be taken to increase competition in the provision of audit and
attest services for large national and multinational companies. When asked
whether steps should be taken to increase the number of available choices,
79 percent (65 of 83) opposed government action to break up the Big 4,
while 66 (55 of 83) percent opposed any government action to assist
non-Big 4 firms. Seventy-eight percent (64 of 82) of respondents said they
would favor letting market forces operate without government intervention.

While some respondents expressed their belief that the market would adjust
to create a more competitive environment, others expressed uncertainty
about whether government actions could increase competition. According to
one respondent, "Government action to assist the non-Big 4 firms will not
work. The level of expertise and depth of resources required to deal with
ever increasing levels of complexity and regulation cannot be [solved
through] government intervention." However, another respondent commented,
"Having only four large firms is a concern. The benefits of consolidation
should be higher quality, less variation in advice, stronger financial
resources of the accounting firm, and more accountability. If these
benefits are not achieved, then the government may need to intervene." In
addition, several respondents expressed concern about further
consolidation. Referring to the dissolution of Andersen, one respondent
said, "Our biggest concern is the ease with which a firm can disappear."
Another stated, "The failure of Andersen had a devastating impact and
ultimately resulted in fewer qualified professionals providing attest
services during a time of rapidly increasing complexity in applying GAAP."

We are sending copies of this report to the Chairman and Ranking Minority
Member of the House Committee on Energy and Commerce. We are also
sending copies of this report to the Chairman of SEC, the Chairman of the
Public Company Accounting Oversight Board, and other interested parties.
We also will make copies available to others upon request. In addition,
the
report will be available at no charge on the GAO web site at
http://www.gao.gov.

This report was prepared under the direction of Orice M. Williams,
Assistant Director. Please contact her or me at (202) 512-8678 if you or
your staffs have any questions concerning this work. Key contributors are
acknowledged in appendix IV.

Davi M. D'Agostino
Director, Financial Markets and
Community Investment

Appendix I

Scope and Methodology

We surveyed a random sample of 250 of the 960 largest publicly-held
companies. We defined this population using the 2003 list of the Fortune
1000 companies produced by Fortune, a division of Time, Inc., after
removing 40 private companies from this list. We mailed a paper
questionnaire to the chief financial officers, or other executives
performing a similar role, requesting their views on the services they
received from their auditor of record, the effects of past consolidation
on competition among accounting firms, and its potential implications. To
develop this questionnaire, we consulted with a number of experts at GAO,
the American Institute of Certified Public Accountants, and the Securities
and Exchange Commission, and pretested a draft questionnaire with six
large public companies from a variety of industries. The survey began on
May 6, 2003. We removed one company that had gone out of business and
received 159 usable responses as of August 11, 2003, from the final sample
of 249 companies, for an overall response rate of 64 percent. The number
of responses to an individual question may be fewer than 159, depending on
how many respondents answered that question.

While the survey results are based on a random sample drawn to be
representative of the population of publicly held Fortune 1000 companies
and thus could be adjusted statistically to represent the whole
population, including those not sampled, we are instead reporting totals
and percentages only for those companies actually returning
questionnaires. We did this because a significant number of sampled
companies did not respond, and the answers respondents gave could differ
from those nonrespondents might have given had they participated. This
kind of potential error from nonresponse, when coupled with the sampling
error that results from studying only a fraction of the population, made
it particularly risky to project the results of our survey to not only the
nonrespondents, but also to the part of the public company population we
did not sample. There are other practical difficulties in conducting any
survey that may also contribute to errors in survey results. For example,
differences in how a question is interpreted or the sources of information
available to respondents can introduce unwanted variability into the
survey results. We took steps during data collection and analysis to
minimize such errors. In addition to the questionnaire testing and
development measures mentioned above, we followed up with nonresponding
companies with telephone calls to help them overcome problems they
encountered in completing the survey and to encourage them to respond. We
also checked and edited the survey data and programs used to produce our
survey results.

Appendix I
Scope and Methodology

All 159 companies responding to our survey employed a Big 4 firm as their
auditor of record. These companies derived an average of 83 percent of
their total revenues from operations within the United States and paid, on
average, $3.19 million in fees to their auditor of record in the fiscal
year prior to the survey. Using Standard Industry Classification (SIC)
codes, we found that 149 respondents represented 39 different industry
sectors; we could not identify an SIC code for the other 10 respondents.
The top 7 industry sectors represented were

o  electric, gas, and sanitary services (17 companies),

o  depository institutions (10 companies),

o  business services (9 companies),

o 	industrial and commercial machinery and computer equipment (9
companies),

o  wholesale trade-non-durable goods (9 companies),

o  chemicals and allied products (8 companies), and

o 	electronic and other electrical equipment and components, except
computer equipment (6 companies).

Appendix II

                        Annotated Public Company Survey

                    United States General Accounting Office

                           Survey of Public Companies

Introduction

The Sarbanes-Oxley Act of 2002 mandated that the U.S. General Accounting
Office (GAO), the independent research and investigative arm of Congress,
study the impact of the recent consolidation of firms in the accounting
profession.

To provide a thorough, fair, and balanced report to Congress, it is
essential that we obtain the experiences and viewpoints of a
representative sample of public companies.

Your company was selected randomly from the 2002 list of Fortune 1000
companies. It is important for every selected firm to respond to ensure
the validity of our research.

The results of the survey will be compiled and presented in summary form
only as part of our report, and GAO will not release individually
identifiable data from this survey, unless compelled by law or required to
do so by the Congress.

Instructions

Please complete this questionnaire specifically for the company named in
the cover letter, and not for any subsidiaries or related companies.

This questionnaire should be completed by the Chief Financial Officer
(CFO) or other executive of this organization who can provide historical
information on mergers, operations and finance, as well as report the
corporate policy of this firm.

Please return the completed questionnaire in the enclosed envelope within
10 business days of receipt. If the envelope is misplaced, our address is:

U. S. General Accounting Office Attn: Cecile Trop 200 W. Adams Street,
#700 Chicago, IL 60606

If you have any questions or concerns about this survey, please contact:

Michelle Pannor Telephone: (202) 512-3608 Email: [email protected]

Thank you for participating in this survey.

                                       1

Appendix II
Annotated Public Company Survey

Appendix II
Annotated Public Company Survey

Appendix II
Annotated Public Company Survey

Appendix II
Annotated Public Company Survey

Appendix II
Annotated Public Company Survey

Appendix II
Annotated Public Company Survey

Appendix II
Annotated Public Company Survey

Appendix II
Annotated Public Company Survey

Appendix II
Annotated Public Company Survey

Appendix II
Annotated Public Company Survey

Appendix II
Annotated Public Company Survey

Appendix II
Annotated Public Company Survey

31. What do you believe is the minimum number of accounting firms
necessary to provide audit and attest services to large national and
multinational public companies? Please enter a number.

______________ number of firms

N=147

Range of responses=0-3 N=27 18% Range of responses=4-5 N=86 59% Range of
responses=6-8 N=31 21% Range of responses=10+ N=3 2%

Please explain:
____________________________________________________________
_________________________________________________________________________
_________________________________________________________________________
_________________________________________________________________________

32. What do you believe is the optimal number of accounting firms for
providing audit and attest services to large national and multinational
public companies? Please enter a number.

______________ number of firms

N=136

Range of responses=0-2 N=5 4% Range of responses=3-4 N=14 10% Range of
responses=5-8 N=100 74% Range of responses=9+ N=17 12%

Please explain:
___________________________________________________________
_________________________________________________________________________
_________________________________________________________________________
_________________________________________________________________________

                                       13

Appendix II
Annotated Public Company Survey

33. Do you suggest that any actions be taken to increase competition in
the provision of audit and attest services for large national and
multinational public companies? Please check one box. N=159

1. Yes 22%

2. No 62%

3. Don't know 16%

Please explain:
___________________________________________________________

_________________________________________________________________________

_________________________________________________________________________
_________________________________________________________________________

34. Would you favor or oppose the following actions to increase
competition to provide audit and attest services for large national and
multinational clients? Please check one box in each row.

                                              Neither                         
                                              Favor                           
                                     Somewhat nor     Somewhat Strongly Don't 
                           Strongly  Favor    Oppose  Oppose    Oppose  Know
                           Favor (1) (2)      (3)     (4)        (5)     (6)
                Government                                                    
                 action to    2%        7%      12%     22%      57%     0%
              break up the                                              
                Big 4 N=83                                              
             Government                                                       
             action to                                                  
             assist the       2%       18%      13%     17%      49%     0%
             non-Big 4                                                  
             firms N=83                                                 
             Let market                                                       
             forces                                                     
             operate          48%      31%      13%      4%       2%     2%
             without                                                    
             intervention                                               
             N=82                                                       
                   Other -                                                    
                    please    N=9      N=1      N=0     N=0      N=0     N=0
                 describe:                                              
                      N=10                                              
                   Other -                                                    
                    please    N=1      N=0      N=0     N=0      N=1     N=0
             describe: N=2                                              
                   Other -                                                    
                    please    N=0      N=0      N=0     N=0      N=0     N=0
             describe: N=0                                              

                                       14

Appendix II
Annotated Public Company Survey

35. Do you have any additional comments on any of the issues covered by
this survey? Please use the space below to make additional comments or
clarifications of any answers you gave in this survey.

Thank you for your assistance with this survey! Please return it in the envelope
                                   provided.

                                       15

Appendix III

Summary of Written Comments to the Public Company Survey

Companies surveyed were invited to add written comments to a number of
questions to further explain their answers. Of the 159 respondents that
responded to the survey, 149 volunteered written answers to at least one
of the eight key open-ended comment questions in our survey:

o  change in audit quality,

o  the number of auditor options,

o  the sufficiency of such options,

o  willingness to use the auditor of a competitor,

o  minimum number of audit firms necessary,

o  optimal number of firms,

o  suggested actions for increasing competition, and

o  any additional comments on the survey.

The following tables display selected comments from some respondents to
these eight questions. Some of the quotes illustrate typical comments made
by several other companies, while others represent a unique viewpoint of
only that company. While these specific comments provide valuable
insights, the number of comments of a particular type reproduced here is
not necessarily proportional to the number of other similar responses,
and, therefore, the comments do not represent the variety of opinion that
might be found in the population of large public companies as a whole.

Change in Audit 	More respondents said that overall audit quality had
gotten better over the past decade than worse (44 percent compared to 18
percent). The reasons

Quality	behind these ratings are presented in table 2, grouped into
summary categories.

                                  Appendix III
                   Summary of Written Comments to the Public
                                 Company Survey

               Table 2: Explanations for Changes in Audit Quality

  Drawn from 56 responses to question 16-"If you have experienced a change in
                        audit quality, please explain."

Direction of General category of 
     quality                        
      change        explanation                      Comment                  
      Better       Audit methods                  "Improved methodologies and 
                                    documentation. Improved support tools and 
                                              depth of expertise."            

"Improvements largely reflect steady, incremental improvements in
effectiveness-applying new technology, lessons learned from customer
feedback, etc."

              "More focus on risk analysis and internal controls."

Staffing/expertise "Better experienced audit staff; better national level
resources available."

"Greater familiarity and experience of auditors with our company has had
some positive impact on quality. They understand our business more and are
much more efficient."

            "Broader client base gives greater practice experience."

Environmental forces	"I believe there has been a change, but driven more
by the environment and Sarbanes-Oxley."

"Change in the depth and quality of the audit process is due to a more
rigorous regulatory and litigation environment and not audit
consolidation."

Changing requirements	"Audit quality is somewhat higher, due to added GAAS
requirements rather than consolidation of audit firms."

"Audit quality has been positively impacted by new independence
requirements and scrutiny of the accounting industry."

Client actions	"Our audit quality has increased as we have changed audit
partners and have requested an increase in scope and scrutiny."

"We are challenged thoroughly to document fully matters of judgment and
estimates."

"Recent events have caused [our auditor] to scrutinize more closely and we
have asked for more coverage in certain areas."

    Worse Audit methods Less specific transaction testing now than before."

"Less insightful; rarely identifies known matters of concern; overly
simplistic in approach; poor identification of financial and business
risks."

"Focus on `form' of compliance not substance... Audits in `90s did not
focus on controls...Sarbanes-Oxley 404 brings controls back to forefront
but of little value as audit firms are focused on fee, opportunity & form
(not substance) which should have been there (in audits) these past 10
years for auditors to attest as to validity of financial results."

"Auditors are increasingly worried about 'checklist' compliance with
unduly complicated GAAP rules rather than assessing 'fair presentation' in
the context of the company's line of business."

                                  Appendix III
                   Summary of Written Comments to the Public
                                 Company Survey

                         (Continued From Previous Page)

Direction of quality General category of change explanation Comment

Staffing/expertise	"Less involvement by partners/senior management, lower
quality planning and execution."

"Too much reliance on technology to cut hours; less on the ground time;
staff turnover higher."

"Firms have become cookie-cutter checklist type of auditors. Very little
business sense of experience exists. The auditor should know more than the
client but that doesn't exist today."

       Environmental forces "Slight decline mainly due to fee pressure."

"Less competition; more regulation; more complexity; more `legalistic,'
nonproductive effort and protectionism on everyone's part."

Timeliness	"The timeliness of resolving issues is much slower and the
answers to key accounting issues can change shortly before filings and/or
press releases."

"Too much info to keep `current' on results in longer internal review
process and longer decision-making process on part of the auditors."

Source: GAO.

Number of Auditor Options Available

Almost all respondents-94 percent-indicated that they had three or fewer
options from which to choose if they had to change auditors, and 61
percent said exactly three. The explanatory comments we received to that
question, shown in table 3, confirm that respondents are almost always
referring to the Big 4 firms other than the one they currently employ. As
only 8 percent of respondents said they currently use or would consider
using a non-Big 4 firm, there were few written explanations for why they
thought they had more than three or four options. Those who did explain
mentioned the national prominence of the larger second-tier firms and
smaller firms with special industry expertise as reasons.

Appendix III
Summary of Written Comments to the Public
Company Survey

Table 3: Explanations for the Number of Auditor Options Available

Of the 157 responses to question 24-"Aside from your current auditor of
record, how many firms do you think your company would have as options if
you needed to change auditors?"-130 respondents also provided comments.
Below are selected comments.

                            Range of options Comment

Three remaining Big 4 "As a Fortune 100 company, I believe that our
realistic options firms are currently limited to the Big 4."

"I believe the board and management would require that the switch be made
to a Big 4 firm."

"Because of our size and technical complexity, we would choose from the
remaining Big 3."

"We have operations in 40 countries-all operating on the same systems,
procedures. Only a global firm can deal with this complexity in a cost
effective manner and continuity of support for US GAAP and local statutory
requirements."

Only one or two of the "Remainder of Big 4 firms who have an
expertise/knowledge of

Big 4 firms	our industry and a willingness to take on new clients in our
industry."

"...Aside from our current auditor, we use another of the Big 4 as a
co-source provider of internal audit services, so would not consider them.
We are using a third for tax work so it would be hard under Sarbanes-Oxley
to switch to them."

"One of the remaining Big 4 would probably be excluded due to potential
independence issues."

"Only two firms other than [our current auditor] in the northwest that
have energy experience and expertise."

"Current and predecessor audit firm exclusion leaves only two other Big 4
firms. However, both of these firms have existing relationship with major
direct competitors."

Others in addition to "It would be fairly easy to transition to one of the
other `Big 4.'

the Big 4 firms	However, there are probably only a couple regional firms
that have industry expertise and a base of operations in Nevada, such that
we could utilize them."

"Other three of the Big 4; two other firms of sufficient capability
(technical expertise, SEC experience, industry experience, sufficient
staff resources-quantity & quality) could probably be identified."

"We would consider the remaining Big 4 firms and could also consider the
top 2 non-Big 4 firms. But because of our international operations, our
bias would be strongly in favor of a Big 4 firm."

"National firms of prominence." [This company said it had five options.]

Source: GAO.

                                  Appendix III
                   Summary of Written Comments to the Public
                                 Company Survey

Sufficiency of the Number of Options

Almost half of the respondents (43 percent) said they did not have enough
options and desired more. Respondents who said they had enough options
said the Big 4 firms were able to meet their needs. However, several of
these respondents cautioned that further reductions could be problematic.
Those saying the number of firms was not sufficient often took the
position that "more competition is always better." Other comments included
that differentiation between the firms' services was declining, special
expertise was not longer readily available, and monopolistic tendencies in
setting fees. See table 4.

Table 4: Number of Auditor Options Available

Of the 158 responses to question 25-"Do you think the number of firms your
company has as options for auditing and attest services is enough?"-63
respondents also provided comments. Below are selected comments.

General category of Sufficiency of options explanation Comment

Sufficient     General       "Current firms as sufficient to meet business 
                                                       needs and independence 
                               rules. Sarbanes-Oxley Act and subsequent rules 
                                                        are more constraining 
                                          than [number] of firms."            
                               "[Sufficient] but just barely. I felt much     
                               more comfortable with 5 or 6."                 
                                      "Three firms still provide a variety of 
              Competition/fees        choices and competition; however, if it 
                                  declines further problems could arise."     

"There is adequate competition and rivalry among 4 firms."

"...While more firms would possibly increase competition, I think the fee
effect would be modest."

Specialties/expertise	"The other 3 Big 4 CPA firms should possess
appropriate professional qualifications and be able to provide services on
a global basis."

     "All 4 firms have good technical competence and sufficient resources."

Insufficient General	"I do not believe that the 4 major firms offer
sufficient alternatives. Too many potential conflicts with customers,
vendors, partners, etc., to ensure independence in all cases."

"Considering a need to spread work among non-competitor firms, 4 is too
small. Also, in-house auditing can't be done by the named firm,
audit-related work is being spread to others, as is non-audit work; 4
large firms limits choices."

"It is always better to have more competition."

Competition/fees	"It is clear that [auditor] believes they can become more
aggressive with billings due to the lower number of competitors."

"We believe that there are not enough choices. More competition might
drive audit fees down."

Specialties/expertise	"We would feel more comfortable about locating a
firm that fit our geographic and technical needs if there were more
options."

                                  Appendix III
                   Summary of Written Comments to the Public
                                 Company Survey

                         (Continued From Previous Page)

General category of Sufficiency of options explanation Comment

"It would be great to have large national alternatives to call on like the
old Kenneth Leventhal & Co. which had an expertise in real estate and was
national."

Differentiation "Not sufficient differentiation in audit approach, personality."

                          "Talent pool is restricted."

Source: GAO.

Willingness to Use 	More than 90 percent of our respondents said that
their company would choose the auditor of a competitor. A few of those
respondents provided

Auditor of Competitor explanations as to why they would or would not, as
shown in table 5.

Table 5: Explanations of Why a Company Would or Would Not Choose the
Auditor of a Competitor

Of the 157 responses to question 26-"Would your company choose as your
auditor of record an accounting firm that currently audits one of your
competitors?"-87 respondents also provided comments. Below are selected
comments.

Would choose a competitor's auditor? Comment

No	"Not in same city. Would not want same personnel auditing a
competitor."

"Probably not if a primary competitor in our key markets -concerns about
auditor personnel discussions, etc."

                      "Too much competitive intelligence."

"Not one of our major, direct competitors. Partly for confidentiality and
partly because we don't want to be the `#2' client and fail to attract the
best talent at our auditor."

"I would rather say `maybe.' The fact that our major competitor was one of
the 3 other Big 4 firms available would be a `strike' against that firm
due to sensitive information."

            "Industry too small and potential conflicts too risky."

Yes	"Comfort that there would be no risk of competitive information being
communicated within audit firm or to competitor client."

"The confidentiality and integrity of the audit firm should allow for
this."

"We have too many competitors to use this as a valid screening criterion.
Also, we have confidence in the `Chinese walls' inside of [our auditor]."

                                  Appendix III
                   Summary of Written Comments to the Public
                                 Company Survey

(Continued From Previous Page)

Would choose a competitor's auditor? Comment

"With only 4 firms to choose from, we've had to change our views on this."

"Because of the limited choices we must be willing to choose a firm that
audits competitors."

"Our current auditor audits a significant portion of our peer group. We
consider that a good thing for addressing new accounting issues."

"This decision will be based on the professional qualifications of the CPA
firm and we would expect that firm to maintain the highest level of
confidentiality. Some of our competitors are audited by other Big 4 firms
so it is possible that we may select one of these firms"

As long as the competitor's audit was not performed out of the same local
office.

                                  Source: GAO.

Minimum Number of 	A large majority (82 percent) of respondents said that
the minimum number of firms necessary to provide audit services to large
companies

Firms Necessary 	such as theirs was four or more. The largest number of
responses was received for four or five firms. See table 6.

Table 6: Explanations of Minimum Number of Firms Necessary

Of the 147 responses to question 31-"What do you believe is the minimum
number of accounting firms necessary to provide audit and attest services
to large national and multinational public companies?"-84 respondents also
provided comments. Below are selected comments.

Number of firms Comment

2-3	"One firm would be a monopoly-two firms would allow for some
competition."

"If for some reason we had to switch auditors (poor service, conflicts of
interest, etc.) we would have at least two firms to look at."

"Having at least two choices from your current firm is important to
maintain competition. Otherwise, there would be no competition when you
made a decision to change and fees/quality would be adversely impacted."

                                  Appendix III
                   Summary of Written Comments to the Public
                                 Company Survey

(Continued From Previous Page)

Number of firms Comment

4	"Seems ok now but shouldn't be any less. Better now for primarily
domestic companies like ours."

"We're doing it now. I'd hate to see that number go lower. A higher number
would be preferred."

"If there are more firms than this you have to question whether they would
have the size and scale to support multinational audit."

"There should not be further consolidation within the Big 4 firms. This
group represents our service provider choices given the size and
complexity of [our] worldwide operations."

"Current set up is minimum to provide coverage due to risk of big 4
regressing to an oligopolistic common cost/performance level that provides
insufficient audit quality at too high a cost."

5-6	"No good reason other than 4 is too few. If one more firm
fails/choices for separate firm consulting and it projects -conflicts
between businesses become impossible."

"The minimum of 6 firms is based upon expanding competition is many
geographical areas. Currently with only 4, there are areas where only 2 or
3 are active."

"With four firms, a 25% success rate on bid is high. Fair competition is
better served when the success rate to bid is below 20%."

"Biggest issue is that the potential for overlaps of coverage of closely
associated competitors, vendors and customers makes it harder to ensure
independence absentee conflicts. With six, this should be able to be
avoided."

7-12	"In order to get competition and assure that all your competitors
don't use same people (firms). You need more firms than currently
available. We've lost creativity and competition as a result of
consolidation."

"Right balance of competition in price & service."

"With a restriction that no firm has more than 20% of the market- defined
as member of SEC registrants."

                                  Source: GAO.

Optimal Number of 	Most (86 percent) respondents said the optimal number
of firms was greater than four, although the majority of those responses
remained in the

Firms five to eight range. See table 7 for selected comments.

Appendix III
Summary of Written Comments to the Public
Company Survey

                Table 7: Explanations of Optimal Number of Firms

Of the 136 responses to question 32-"What do you believe is the optimal
number of accounting firms for providing audit and attest services to
large national and multinational public companies?"-66 respondents also
provided comments. Below are selected comments.

Number of firms Comment

"As a firm believer in the efficiency of the market place, I believe that
the current number of large firms (4) is probably close to the optimum
number, but wouldn't mind seeing another major firm gradually emerge."

"Any more would result in consolidation as we have seen over past 15
years."

"Four firms provide enough choices from which to select. Also, by limiting
the number of firms to four ensures that there will be capable & talented
individuals available at the firms."

"We believe that a couple more choices than currently available would be
optimal, but any additional beyond that would not be incrementally
beneficial to companies."

"Need a balance between the healthy level of diverse views of accounting
application, and having too much inconsistency."

"Two more large firms would help avoid problems -particularly if certain
firms are conflicted through board membership, and other issues."

"The highest quality of service came at a time in history when there were
8 firms."

"Big 8 provided more choice, competition."

"Beyond 8 I don't believe there will be enough qualified personnel."

"More choice would be preferable, although industry experience is very
important to us."

"Having a few large firms has caused the firms to take on more of a
`market share' mentality with too much focus on increasing client base and
fees and not enough focus on providing a quality audit."

10 or more	"The more firms of similar size, caliber, quality, knowledge
the more choices for public companies."

"Enough for both scale and price competition."

"This number [20] would allow for better stratification of clients by
size, geographic needs, etc. However current legal environment and
complexity of rules and regulations probably makes this difficult. We
choose the large firms because of their depth of resources and expertise.
Increasing the level of complexity just eliminates more firms."

Source: GAO.

                                  Appendix III
                   Summary of Written Comments to the Public
                                 Company Survey

Suggestions for 	While 62 percent said no actions should be taken and 16
percent did not know, 22 percent of respondents said that they thought
actions should be

Increasing Competition 	taken to increase competition in the audit
industry. When asked to explain, those that favored action mentioned
assisting non-Big 4 firms to by reducing barriers to entry, preventing
further consolidation, breaking up the Big 4, and other actions. Many
suggested that market forces should be allowed to operate without
intervention. See table 8.

Table 8: Suggestions for Taking Action to Increase Competition

Of the 159 responses to question 33-"Do you suggest that any actions be
taken to increase competition in the provision of audit and attest
services for large national and multinational public companies?"-37
respondents also provided comments. Below are selected comments.

Action
suggested? Comment

Yes	"Perhaps assist the non-Big 4 to become `big' by reducing some
barriers to entry."

"Government assistance to non-Big 4 accounting firms."

"Encourage regional firms to develop national organization."

"Expand the number of companies and reduce the educational Inequities
placed upon new public accountants versus accountants in the private
sector."

"...Help smaller firms grow larger. Incentives [to] companies to use
smaller firms...."

"Financial solvency of existing Big 4 firms must be secured primarily
through tort reform."

"Action should be taken to maintain current level of competition or
choice."

"Liability for audit failures should be limited. The failure of Andersen
had a devastating impact and ultimately resulted in fewer qualified
professionals providing attest services during a time of rapidly
increasing complexity in applying GAAP."

"Allow no more mergers. Fire the idiots in the Justice Dept. that killed
Andersen; absolutely asinine."

"I would like to see some of the firms broken up. How to do so is another
question."

"They will need some effort to break them up. The idea that one firm is
needed to handle worldwide engagements is absurd."

"Require rotation of audit firms."

                                  Appendix III
                   Summary of Written Comments to the Public
                                 Company Survey

(Continued From Previous Page)

Action
suggested? Comment

"Separate audit & attestation services."

"Enable a competing firm to provide a company's Sarbanes-Oxley attest
function."

No or don't know "Market forces should be allowed to work freely without
constraints."

"The market will adjust/add more competitors if needed/supported, over
time."

"Allow market based forces to continue to operate without intervention."

"I believe in free enterprise market conditions & competition will provide
adequate alternatives."

"Do not favor government intervention in the marketplace."

"Current level of competition combined with strong corporate reporting
regulations, appears sufficient to allow market forces to operate."

"I cannot foresee how this would be accomplished. `Competition' for the
audit piece comes into play very infrequently and switching
costs/disruption are very high. I oppose any government action to
encourage a breakup."

"There should be opportunities for smaller firms (e.g., BDO Seidman) to
get bigger and be able to handle large, international accounts."

"Big 4 firms are competitive today. No need to take action."

"Enough pressure on price, quality pressure remains high."

                                  Source: GAO.

Additional Comments 	We asked respondents to volunteer any additional
comments on the issues in the survey. A number of respondents mentioned
concerns about further consolidation in the accounting profession, cost
and quality, and other issues such as the impact of the Sarbanes-Oxley act
and proposals for mandatory audit firm rotation.

Appendix III
Summary of Written Comments to the Public
Company Survey

Table 9: Additional Comments

Drawn from the 33 answers given to question 35-"Do you have any additional
comments on any of the issues covered by this survey?"

Type of
Comment Comment

Consolidation concerns "The number of firms cannot be permitted to go
below 4. To destroy a firm like Andersen because of the action of a few
partners was nonsense and must not happen again. The remaining firms have
now a license to increase fees disproportionately to existing levels,
especially with Sarbanes-Oxley. Has anyone calculated the cost to us
industry of this and measured the impact on future earnings and jobs -I
doubt it!"

"Having only 4 large firms is a concern! However, the benefit should be:
-higher quality-less variation in advice- stronger financial
resources-more accountability. If these benefits an not achieved, then
government may need to intervene."

"...Our biggest concern is the ease at which a firm can disappear (e.g.,
A. Andersen)....Competition does not affect us now, but actions beyond our
control (e.g., firm disappears) could put us in a position to search...."

               "4 major audit firms is too few! 6+ is a minimum."

"It would be in the best interest of the public to have more choices.
However, the reason there is less is due to the fixed infrastructure cost
of large firms and the need for a global reach. Therefore size does
count."

"Consolidation of auditors and increased regulation has greatly increased
the cost of governance. I'm not sure society is benefiting from this."

"Government action to assist the non-Big 4 firms will not work. The level
of expertise and depth of resources required to deal with ever increasing
levels of complexity and regulation cannot be provided by government
intervention."

"...I am concerned about the stability of the existing Big 4 firms with
the implications from audit-failure lawsuits. Can these firms survive
financially an Enron-like lawsuit? What choices do global fortune 500
companies have if another one of these firms fail? The next tier of firms
has not developed a strong enough global network to be viewed as viable."

The government forced Arthur Andersen out of business! I certainly don't
condone the activities of a few who did `bad,' but 99.9% of the AA people
were honest, hard-working people, with the highest integrity."

Appendix III
Summary of Written Comments to the Public
Company Survey

(Continued From Previous Page)

Type of
Comment Comment

Cost and quality "The accounting and auditing profession is clearly
broken. The source and concerns 1 root cause appears to be the enormous
compensation levels of the partners in the Big 4-often exceeding those of
the CFOs they are suppose to audit. There is an eternal quest for higher
fees, higher profits and growth. The result of which is to perform less
work for more money. Auditing standards need to be very specific -as an
example, review the documentation/testing now performed on fraud. Even
though numerous standards on fraud detection have been released, the firms
have not substantially changed their audits."

"I think the public accounting profession is in disarray predominantly
because, for several years, audit expertise has been de-emphasized for
selling. While this may appear to be an economic model for success, it has
led to major problems, some of which we have seen coming to fruition
recently. (i.e., lack of ethical standards, lack of basic accounting &
auditing knowledge, etc.)"

"The evolution of the current system of auditing U.S. companies is
bordering on being worthless. We have kids from colleges with no business
experience auditing companies using checklists & cookie cutter approaches
rather than using sound business experience to ferret out problems."

"Very timely subject. I am greatly concerned about this topic. It is very
difficult to manage audit costs. We are paying $150/hour for a college
graduate with very little experience; yet that is what the lack of
competition brings. We are classed for 4 different partner/(3 hrs each) at
$450/hr reviews on a simple SEC consent letter and we are told `that is
our firm policy.'"

"The biggest issue today with audit quality is 'check list' GAAP audits.
We need to be standards based, not rules based. Audits should employ
thoughtful and insightful analysis of the company, industry and economic
environment. This issue however will only be corrected with well thought
out tax reform that allows thoughtful analysis of facts and national
resolutions of disputes."

"Our 2002 audit fees are about 4x those of a decade ago. I do not believe
our stake holders would conclude that they are receiving 4x the value. I
do not believe there is a single solution that would be effective, but
enthusiastically endorse the efforts by GAO to explore the matter."

"As indicated early on in the survey, my perception of the real problem
with auditing today is as follows: -complex standard setting with minimal
consideration of the impact or value to the investing public-audit firms
treat audit like a `loss leader' for other selling opportunities. - audit
firms financially reward partners for selling-not performing quality
audits. Audit staff are inadequately trained to keep up with changing
accounting standards and the complexity of operations."

Engagement partners need very high level of technical competence not sales
skills-engagement partners should be subject to ongoing periodic
proficiency evaluation of some type.

Appendix III
Summary of Written Comments to the Public
Company Survey

(Continued From Previous Page)

Type of
Comment Comment

"My responses do not reflect my expectations about fees in the future.
Although our fees did not increase in 2002, I anticipate that we will see
significant increases in the future (50%-100%) to cover increased hours
required as a result of the new provisions under Sarbanes-Oxley and the
audit firms bearing the cost of securities litigation. We need smart
professionals performing our audits, and increased exposure to audit
failures drives these people to jobs in industry."

Other concerns	"I have a developing concern. The Big 4 provide excellent
audit & attest services in the financial area. Legislation is
preventing/restricting `other' services. Yet corporations are reporting in
more than financial areas, and the shareholders, employees and public want
these other areas (environmental, social, etc.) to be attested and
verified. It would seem beneficial to have the named audit firm provide
such verification. Yet current legislative developments will prevent that.
It seem that the named auditor could provide the best overall
verification. As corporations report in global reporting initiative (GRI)
reports, on sustainability report on triple bottom line (economic,
environmental & social) reports, will there have to be multiple verifying
firms?"

"Litigation/securities reform. Lawsuits are sapping capital & causing
audit fees to rise. CEO & CFOs need to do hard time for the misery they
have inflicted on the rest of us. SEC needs to be a bit restrained in
interpreting S.O. act-we're getting a little too much enthusiasm right
now."

"Summary points: (1) need more competition in the auditing industry. (2)
don't know how best to accomplish this!! (3) in any event - need the SEC
to be more active in the resolution of accounting issues -not just policy
setting!"

"Sarbanes-Oxley legislation has been primarily responsible for increasing
fees and reducing auditor selection choices."

"Strongly opposed to mandatory rotation of independent firms. The start up
costs to corporations would be significant. Also mandatory rotations may
limit the individual firms from innovating to differentiate their service
offering in the marketplace...."

"I am leery of government intervention as it tends to create other
problems. I believe the current focus on audit quality and corporate
governance which is arising out of government policies will (1) raise
costs of being public significantly, (2) fuel going private, (3) change
the capital profile of investors, [and] (4) lead to less efficient markets
and less creativity."

Appendix III
Summary of Written Comments to the Public
Company Survey

(Continued From Previous Page)

Type of
Comment Comment

"The biggest `independence' and `quality' issues faced by corporate
America today are from credit rating agencies, e.g., S&P and Moody's, not
auditors. Rating agencies are a de facto duopoly, are opaque (how they
derive their ratings is largely not determinable based on quantitative
measures), and full of conflicts (selling consulting services regarding
how to improve a company's rating). The government should (1) forbid
rating agencies to sell rating consulting services, (2) require greater
disclosure regarding ratings methodology, and as a last resort (3)
consider breaking up S&P and Moody's or other action to lessen their
duopoly power."

"Companies should be encouraged, not discouraged, to use their audit firm
for tax return and planning support because of the efficiencies gained."

"Consider having investors directly fund audits by an assessment against
assets invested in public entities. Investors could provide audits through
a nongovernment entity like NASD, or they could contract with existing
audit firms."

Source: GAO.

Appendix IV

                     GAO Contacts and Staff Acknowledgments

GAO Contacts	Davi M. D'Agostino (202) 512-8678 Orice M. Williams (202)
512-8678

Staff Acknowledgments

(250159)

In addition to those individuals named above, Martha Chow, Marc Molino,
Michelle Pannor, David Pittman, Carl Ramirez, Barbara Roesmann, and Derald
Seid made key contributions to this report.

GAO's Mission	The General Accounting Office, the audit, evaluation and
investigative arm of Congress, exists to support Congress in meeting its
constitutional responsibilities and to help improve the performance and
accountability of the federal government for the American people. GAO
examines the use of public funds; evaluates federal programs and policies;
and provides analyses, recommendations, and other assistance to help
Congress make informed oversight, policy, and funding decisions. GAO's
commitment to good government is reflected in its core values of
accountability, integrity, and reliability.

Obtaining Copies of GAO Reports and Testimony

The fastest and easiest way to obtain copies of GAO documents at no cost
is through the Internet. GAO's Web site (www.gao.gov) contains abstracts
and full-text files of current reports and testimony and an expanding
archive of older products. The Web site features a search engine to help
you locate documents using key words and phrases. You can print these
documents in their entirety, including charts and other graphics.

Each day, GAO issues a list of newly released reports, testimony, and
correspondence. GAO posts this list, known as "Today's Reports," on its
Web site daily. The list contains links to the full-text document files.
To have GAO e-mail this list to you every afternoon, go to www.gao.gov and
select "Subscribe to e-mail alerts" under the "Order GAO Products"
heading.

Order by Mail or Phone	The first copy of each printed report is free.
Additional copies are $2 each. A check or money order should be made out
to the Superintendent of Documents. GAO also accepts VISA and Mastercard.
Orders for 100 or more copies mailed to a single address are discounted 25
percent. Orders should be sent to:

U.S. General Accounting Office 441 G Street NW, Room LM Washington, D.C.
20548

To order by Phone: 	Voice: (202) 512-6000 TDD: (202) 512-2537 Fax: (202)
512-6061

To Report Fraud, 	Contact: Web site: www.gao.gov/fraudnet/fraudnet.htm

Waste, and Abuse in E-mail: [email protected]

Federal Programs Automated answering system: (800) 424-5454 or (202)
512-7470

Public Affairs	Jeff Nelligan, Managing Director, [email protected] (202)
512-4800 U.S. General Accounting Office, 441 G Street NW, Room 7149
Washington, D.C. 20548

                               Presorted Standard
                              Postage & Fees Paid
                                      GAO
                                Permit No. GI00

United States
General Accounting Office
Washington, D.C. 20548-0001

Official Business
Penalty for Private Use $300

Address Service Requested
*** End of document. ***